U.S. TAX GUIDE IN CHILE
How does the IRS handle capital gains from selling property in Chile?
When you sell a property—whether it’s in Chile or the US—the IRS looks at whether you’ve made a capital gain, which is essentially the profit from selling the property.
If you’re a US citizen or green card holder, you’re required to report the sale to the IRS, even if the property is located abroad.
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How do I calculate capital gains?
Capital gain is the difference between what you originally paid for the property and what you sold it for.
For example:
- Purchase price: What you paid for the property.
- Improvements: Any significant renovations or updates (like a new roof or remodeled kitchen) can increase your cost basis, which is what the IRS uses to figure out how much you originally spent.
- Selling expenses: Costs like agent fees or closing costs can also reduce your taxable gain.
For instance, if you bought a property for US$200,000 and spent US$30,000 on renovations, your cost basis is now US$230,000. If you sold it for US$400,000, the capital gain is US$170,000.
Does it matter how long I owned the property?
Yes. The IRS divides capital gains into long-term and short-term categories, which determine how much tax you pay:
- Long-term capital gains: If you’ve owned the property for more than one year, you qualify for lower tax rates—usually between 0% and 20%.
- Short-term capital gains: If you’ve owned the property for less than a year, it’s taxed at your regular income tax rate, which is typically higher.
What about if the property was my primary residence?
If the property was your main home and you lived there for at least two out of the last five years before selling, you can take advantage of a significant exclusion:
- US$250,000 exclusion for single filers.
- US$500,000 exclusion for married filing jointly.
This means that if your profit from the sale of your home is below those amounts, you don’t have to pay taxes on it.
For example, if you’re married and you sold your home for US$500,000, after buying it for US$300,000, your US$200,000 profit would be fully excluded under the US$500,000 rule.
What happens when I’m married to a non-American?
Things can get a little more nuanced if you’re married to a non-US citizen and file your taxes as married filing separately.
In that case, your exclusion limit drops to US$250,000—half of the US$500,000 you would get if you filed jointly with another US citizen or green card holder.
If the property is jointly owned with your non-US spouse, the IRS will only tax you on your half of the gain.
So if the total profit from the sale is US$300,000, your share is US$150,000, which is still under the US$250,000 exclusion, meaning you won’t owe any capital gains tax on the sale.
What if the property was a rental or investment property?
If the property was a rental or investment, the process gets a bit more complicated. When you sell a rental property, you’ll owe taxes on the full gain, but you can deduct things like depreciation and expenses related to the property.
Additionally, you’ll need to handle something called depreciation recapture. This refers to the depreciation you’ve claimed over the years while renting the property out, and the IRS will require you to “recapture” that when you sell. It means paying tax on the depreciation amount.
What about Chilean taxes?
If you paid Chilean taxes on the sale of your property, you may be able to claim a Foreign Tax Credit on your US tax return.
This credit helps prevent you from being double-taxed by both the US and Chile.
How do I report the sale to the IRS?
When you sell a property, you’ll report it on your Form 1040 using Schedule D (Capital Gains and Losses).
If you’re claiming the home sale exclusion, you’ll also need Form 8949, where you show the IRS that you qualify for the exclusion.
Even if you don’t owe any tax because of the exclusion, you’re still required to report the sale to the IRS.
